'Forget buy and hold, follow the numbers': Saltydog's trading strategy that turns fund investing on its head to beat the market

Forget buy and hold and it doesn’t matter what you invest in, just follow the numbers.

It would be easy to presume someone espousing such a free-range trading strategy would be a hedge fund maths whizz-kid. Certainly, the impressive returns chart placed on the table to back up the theory plotting a portfolio’s progress against the market looks like classic hedgie material.

It shows a portfolio performance line that rides the ups while dodging much of the downs, to not just beat the market but do so while avoiding a substantial amount of volatility.

Steady performer: Saltydog's Tugboat portfolio has beaten the market since its launch while dodging someof the steep drops.

Yet the man outlining this investing strategy is not a graduate parachuted from cutting-edge maths to high finance, but a seasoned entrepreneur tired of his financial advisers’ lacklustre returns, who gave his portfolios nautical names in honour of time in the Merchant Navy.

Douglas Chadwick is the outspoken character behind Saltydog Investor, where the Tugboat and Speedboat portfolios, sit alongside performance figures crunched into risk brackets ranging from Safe Haven, to Steady As She Goes and Full Steam Ahead.

The subscription service tells investors what is going up and what is going down and then explains how its model portfolios use that information to play the market.

What makes its momentum trading strategy stand out is that it uses investment funds, trusts and trackers but turns the fund management world’s usual thinking on its head.

So can the idea of buying what’s rising, selling what’s sinking and ignoring what the ‘investing experts’ are picking translate into a winning formula?

The Saltydog idea

The underlying concept behind Saltydog Investor is known as momentum trading. At the simplest level this consists of buying what’s hot and ditching what’s not, with the aim of making a profit on herd mentality.

Followers of the theory do not worry about holding for the long-term, working instead on the principle you buy the best performing investments at any given time, sell as their performance eases off and swiftly move onto the next set of high fliers.

You buy when things have already begun to do well and sell when they start to head back down. A momentum investor is never likely to get in at the bottom or sell out at the top, but that doesn't matter because by buying low and selling high you still make money.

This means no emotional attachment to what you are investing in, very little concern about what it is or does, and sticking to a regular trading system.

In short, it is the antithesis of much of what the stockbroking and fund management world advises you to do.

Where the Saltydog system is unique, however, is that its main model works not on individual shares or even index-tracking exchange traded funds, as most momentum trading strategies do, but using actively managed funds.

That involves taking the huge amount of performance data pumped out by the fund management world, crunching it on a far more short-term basis than you will see elsewhere, and then updating subscribers every week on what is happening and what Saltydog has done with its portfolios.

This has meant investors can not only follow the system with relatively low trading costs - it is still possible to buy and sell funds without paying dealing fees - but also that they can benefit from the added extra performance a fund manager can bring at any given time.

Without dipping into the complex world of leveraged investment, an exchange traded fund will never beat an index, as it is designed to simply track it, and will actually lose out once the drag of fees are taken into account.

Good active managers picking shares for their funds do regularly beat the market. Crucially, however, they will not do this all of the time. Saltydog's momentum trading idea involves buying into them when they are doing well and ditching them when that outperformance eases off.

How has this system performed?

The chart above plots Saltydog's cornerstone Tugboat portfolio against the wider market, since November 2010 when it was launched.

THE TUGBOAT PORTFOLIO

Richard Webb says: 'This portfolio
was launched in November 2010 to demonstrate how our fund and sector
data can be used to manage a portfolio. It's aim is to be relatively
cautious, and avoiding losses when markets are declining is as important
as making gains when they are going up

'Although we are proud of our
portfolio performance it's not our primary focus. Our aim is to give
people the information that they need to actively manage their own
investments in line with their own personal requirements, and to help
them build a more secure financial future.'

At first glance it may not look overly impressive, but follow the line and you can see that the Tugboat has managed to do well as the market rises and then avoid the worse of the dips.

The most recent Saltydog July newsletter showed it up 23.5% since launch, which equates to an annual return of 8.4%.

That looks good, but this is a relatively short period of time to assess any investing model over.

I put it to Richard Webb, one of the brains behind Saltydog, that surely the kind of turbo-charged benign market conditions we have seen during that period make success relatively simple?

'It's easy to look back and think that since the financial crisis we have been in one long bull market, it didn't feel like that at the time,' he says.

'Since we started this portfolio we have experienced wars in the Middle East, a tsunami in Japan, the downgrading of the American and British credit rating, the fall of several European heads of state, Hurricane Sandy, the fiscal cliff, quantitative easing, the threat of quantitative squeezing, and endless problems in the eurozone.

'During this period the FTSE 100 has seen two major corrections, in August 2011 and May 2012, both of which we avoided, and more recently when the FTSE 100 dropped nearly 12% our portfolio went down less than 4%.

A port in a storm: The Tugboat portfolio aims to get out of risky assets when times are tough and even move into cash.

How this all works

Saltydog is not an investment house, adviser or tipping system, instead it offers a newsletter and online information service to subscribers who pay £25 per month.

On a weekly basis, fund data from across the actively managed fund universe is put through the Saltydog system to deliver information on recent performance at a fund sector and then individual fund level.

This is then divided into simple to understand categories:

Safe Haven: Very low risk, but also very low returns.

Slow Ahead: Normally a low risk level and often with adequate returns.

Steady as She Goes: Generally low to medium risk, with potentially higher returns.

Within this subscribers can then see how sectors, for example Japan, UK Equity Income or US, have done and the top performing funds over the past four weeks, 12 weeks and 26 weeks, along with where they sit in weekly deciles going back eight weeks.

Each week an update is sent out to subscribers showing all this, along with news of any changes to the Saltydog portfolios, which the team behind the system have their own money in.

On a monthly basis a newsletter is also sent out delivering more detail on what has been happening recently.

The portfolios take heed of market conditions and volatility, move towards less risk areas and even cash when times are bad and be more gung-ho when times are good. The underlying strategy is to invest in the sectors and subsequently the top funds in them that are going up and then get out when they start to slide, moving on to the next opportunity.

Subscribers could track what the Saltydog portfolio is doing themselves, or use the information to build their own selection of funds depending on how much risk they want to take.

Mr Chadwick explains that investors using the system do not need to be constantly monitoring their funds but that this is not a buy and hold strategy and people need to commit to reviewing holdings at least once a month.

However, the Saltydog portfolios do not trade for trading’s sake and if something is doing well for an extended period they will remain there, as long as market risk conditions don’t change dramatically.

What are the downsides?

The problem most investors face when they try to adopt trading systems is that they either do not follow them properly or fail to commit the time needed to do so.

This is the reason why buy-and-hold investment based on good asset allocation and choosing solid funds and trusts works best for most.

However, if you are willing to dedicate some time to growing your wealth adopting a trading strategy, perhaps just for some of it, can prove highly rewarding.

The cost of subscribing to Saltydog will also add up. At £25 per month it comes to £300 per year, which if you have a £20,000 investment pot is the equivalent of a 1.5 per cent drag. Of course, you may find yourself more than making that back through extra gains, or you may even consider it as money that you are spending on a hobby rather than an investment fee.

Mr Chadwick is eager to point out that Saltydog is not a money-making enterprise for him, it is about spreading the word on his system and taking on the world of fund management where fat fees are collected even when things underperform. He says he has already made his fortune in life and he developed this system as a way of protecting it and growing it having become disillusioned with the traditonal model of financial advice. Saltydog offers a two-month free trial.

The other problem with trading is costs. Previously, most DIY investing platforms made money from funds through trail commission and allowed free dealing, however, with new rules that will ban taking a commission cut on new investments soon to come into force that model has changed.

Many platforms now charge a buying and selling fee and those that don’t are quite likely to in the future. These vary in price but often range around £10, change one fund a month and you will buy 12 times and sell 12 times in a year, adding an extra £240 in charges.

This means that if you do decide to adopt a trading strategy it is important to look for a platform that offers either free dealing or a cut price service, but may levy a larger administration fee in return.

The other criticism that has been levied at Saltydog is that by trading with active funds you are not dealing with an investment that is bought and sold immediately, unlike with shares, investment trusts or ETFs there is a time lag on buying and selling funds.

However, what Saltydog points out is that what investors are getting from trading actively managed funds rather than tracker ETFs is the outperformance that fund managers can deliver at times. It also lists data for ETFs and investment trusts and runs a Speedboat portfolio based on ETFs.

FUND JARGON BUSTER

The investment industry's world of abbreviations...Acc: Accumulation - any income generated by the fund like dividends or interest is automatically reinvested.Inc: Income - any income generated is distributed by the fund instead of being reinvested. Dis: Distribution - any income generated is distributed by the fund instead of being reinvested. R: Retail - the fund is aimed at ordinary investors. I/Inst: Institutional - the fund is aimed at corporate investors like pension funds. A, B, M, X etc: Different fund houses use letters for different things. Check with them what they stand for. NT/No trail: Some fund houses use this name on clean funds which carry no commissions for financial advisers, supermarkets or brokers, just the fee levied by the fund manager. But other fund houses use different letters - I, D or Y, for example - so you need to find out for yourself which are clean funds. Gr: Stands for gross. GBP/£: Fund denominated in pounds. EUR: Fund denominated in euros. USD/$: Fund denominated in US dollars. Compiled with online stockbroker The Share Centre